Companies continue to embrace the back-to-basics strategy, and investors seem to think that it is paying off.
The CEO Forum: The Ultimate CEOs: David L. Sokol
Chairman and CEO, MidAmerican Energy Holdings Co.
Fortnightly: Is there an ideal utility structure that you favor, given that you are a company that has vertically integrated utilities, pipelines, and distribution companies all under one roof?
Sokol: We’re just in the wires business in the UK, which is the regulated side of that business, and then we have vertically integrated assets here in 10 U.S. states, and we have pipelines as well. We are fine in any of those sectors; we prefer the regulated side of the business. We think most states in the United States will continue toward maintaining the vertically integrated model because of the ability to manage long-term cost to the consumer more predictably. But some areas are looking at various types of potential partial deregulation. To the extent those are structured properly and all parties understand the risks involved, I think those are areas we can participate in as well.
I think the right structure really has to do with the state and federal views in the various locations.
One cautionary note long term is that deregulation is fine to the extent it doesn’t provide so much volatility that customers can’t manage their energy requirements. So as you move higher up in the food chain, the larger customers have the financial and intellectual wherewithal to manage their energy products. As you move down the customer chain to the smaller customer—the midlevel and then the residential customers—I think the jury is still out at many locations [on] the potential benefits of a competitive fully deregulated marketplace.
[Do] those competitive benefits offset the vulnerability that those customers are placed in when you consider the volatility of fuel price spikes and things of that nature? I think that’s an open question that state legislators or regulators have to fully get their arms around. Too early in the debate people looked at deregulation and said, “Gee, if we deregulate, everything will be more efficient and therefore costs will be lower.” Well, that’s not necessarily true in that when you go to a fully deregulated marketplace. If supply is inadequate to meet demand, prices spike very dramatically. There is a clear open question as to whether the average customer can manage that kind of vulnerability.
That model very much demonstrated its weakness in the California deregulatory efforts back in 2000 and 2001. But various states are questioning the advisability of putting all customers at risk for supply shortages. From our perspective, we think it’s our job to look out for the customer and to make sure the customer has adequate access to appropriately priced energy products. We have to do that fully in cooperation with state and federal regulators and other constituents, but we can’t just allow whatever structure to take place and not keep the customer informed of the potential benefits and risks of that structure. Lots of structures will evolve over time and can work. It’s just important that all participants know what risks they are taking and what benefits they